Japan PM delays sales tax hike, puts fiscal reform on back burner

Japanese Prime Minister Shinzo Abe announced on Wednesday his widely expected decision to delay a scheduled sales tax increase by two-and-a-half years, putting his plans for fiscal reforms on the back burner due to growing signs of weakness in the economy.

While the decision may help Abe win votes at an upper house election on July 10, it could fan doubts about his plans to curb Japan's huge public debt and fund ballooning social welfare costs of a fast-ageing population.

Mindful of opposition criticism that the delay is a sign his "Abenomics" stimulus policies have failed to spur growth, Abe justified the decision, saying it was needed to forestall risks posed by external factors - notably slowing Chinese growth.

It is the second time Abe has delayed an increase in the sales tax to 10% from 8%, after a rise from 5% in April 2014 tipped the economy back into recession.

Abe, whose premiership will end when his term as LDP president finishes in September 2018, had repeatedly said he would raise the tax as planned unless the economy faced a shock from a financial crisis or natural disaster.

But he laid the groundwork for a delay at last week's Group of Seven summit, insisting his G7 partners shared a "strong sense of crisis" about the global economy, and he drew parallels to the 2008 world financial crisis that followed the bankruptcy of Lehman Brothers.

Abe said that while the global economy was not on the verge of another financial crisis, Japan must spearhead efforts to boost global demand by loosening fiscal policy.

Many economists found Abe's comparisons to the Lehman Brothers failure far-fetched, but there is consensus that Japan's economic data has been disappointingly weak.

Manufacturing activity in May contracted by the most in more than three years. Corporate profits fell at the fastest pace in more than four years in January-March, which could hurt capital expenditure plans.